By Majella Gomes
Make no mistake; governance, controls and compliance are becoming more stringent globally, making it more difficult to avoid paying tax regardless of which jurisdiction a business may be operating in. The recent Malaysian Tax Conference 2019 organised by MIA included a panel session on tax compliance developments and issues, moderated by Alan Chung, Head of Indirect Tax, Grant Thornton Malaysia.
Regulatory reforms are key. Country By Country Reporting (CBCR) is demanding more transparency of firms with a global footprint, and amendments are being made to tax treaties worldwide. “Tax treaties are being amended to ensure there is no ‘treaty shopping’,” said panellist Theresa Goh, Partner, Deloitte Tax Services. “BEPS (base erosion profit shifting) laws are pushing for more transparency.”
The reforms have also increased cooperation and coordination among the different legal, enforcement and regulatory agencies, making tracking data easier, and leading to the development of international measures like the Automatic Exchange of Information (AEOI). The volume of data has grown in parallel, making it necessary to apply higher levels of technology to improve compliance; analytical tools like big data analysis allow targeted analysis, identifying trends and patterns that bring wilful evaders to light.
Educating Taxpayers to Drive Voluntary Compliance
Malaysia has a taxpayer base of fewer than two million. Unpaid expatriate taxes stand at RM50 million, and according to the IRB, almost 80,000 individuals did not pay tax in 2017. But there is a broader political context to compliance; taxpayers need to have a deeper understanding of why taxes need to be paid, before they can be expected to fully and voluntarily comply. “The tax base will not get bigger anytime soon, so the focus needs to be on improving compliance” said Laurence Todd, Director, Institute for Democracy and Economic Affairs (IDEAS). “Research has shown that levels of tax compliance in Malaysia correlates with perceptions of how fair the tax system – specifically whether the money collected is and used transparently. In other words, the priority is to build trust and ensure that taxes are collected fairly and spent wisely.”
The need then is for regulators to further engage with taxpayers to achieve higher rate of voluntary compliance – a common goal for both regulators and tax agents. Licensing and enforcement should be reviewed, in view of the less-than-honest tax agents who give their clients bad advice! “Only education can improve compliance,” said Huang Shze Juin, Vice-President, MIA. He added that regulators have to engage with tax agents to reach a larger number of taxpayers but the tone has to be set from the top. “The top must be intent on promoting compliance, not merely punishing evasion,” he stressed. “The tone must be correct.”
Accounting standards too are becoming more complex and divergent from tax reporting requirements, and thus require more effort to reconcile the two during submission of tax returns. The compliance environment can be expected to become even more complex as enforcement of requirements such as transfer pricing, , becomes more widespread. Indeed, it does appear as if the environment is becoming more hostile to taxpayers, with a myriad of factors to comply with when preparing taxes. There have been instances where what had been done earlier had to be reversed, causing further complications e.g. with regards to tax treatments which go against accrual accounting principles, such as the taxation of monies received in advance for services to be rendered. “Reduce divergence and increase convergence to promote ease of compliance,” Huang advised.
Creating a Culture of Compliance
Todd meanwhile opined that compliance was connected to the culture of the taxpayer, and that it was necessary to create a compliant culture “on the ground” although “it takes time for people to feel that it’s worth their time to pay their taxes.”
Citing the example of Scandinavian countries where living standards, taxes and compliance are high, he added that Malaysians need to be invested in paying taxes to support nation building. “They need to buy into the idea of paying taxes,” he said, “and the tone from the top should encourage this.”